Is Refinancing Boom Encouraging Homeowners to Stay Put?

Experts fear cheap refinancing rates could prompt an unwillingness to move—and stoke an even tighter inventory crunch in the future.

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Over the past year, homeowners have been rushing to refinance their mortgage and lock in all-time-low interest rates, which remained below 3% until last week. But could these super-low rates have the effect of encouraging homeowners to stay put even longer, starving the market of desperately needed inventory?

Joe Mellman, senior vice president and mortgage business leader at TransUnion, says he believes homeowners—particularly first-timers who tend to trade up after a few years—may be unwilling to move in the future because of their low refinance rates. Mellman told lending news service Scotsman Guide that if a homeowner has an interest rate of 4%, for example, a 1 percentage point increase in rates could mean that homeowner would pay 25% more in interest if he or she took out a new mortgage. If the homeowner is considering a more expensive home, he or she may see a higher rate as having a sizable impact on affordability.

“What we may end up seeing is a lot more consumers staying in their first home as opposed to moving up,” Mellman told Scotsman Guide. “That, in turn, is going to put pressure on first-time home buyers because now you don’t have this natural vacuum of people leaving the affordable housing stock and moving into more expensive housing stock.”

Lenders refinanced 2.23 million home mortgages in the fourth quarter of 2020, a whopping 71% hike from a year prior, according to the ATTOM Data solutions’ fourth-quarter 2020 U.S. Residential Property Mortgage Originations Report. Refinance activity rose in the fourth quarter compared to the previous quarter in 88% of the metro areas analyzed. The largest quarterly increases in refinances occurred in:

  • Sioux Falls, S.D. (up 75.3%)
  • Reno, Nev. (55.5%)
  • Toledo, Ohio (55.1%)
  • Lake Charles, La. (47.1%)
  • Chicago (up 44%)

Source: “Today’s Refinance Boom Will Likely Impact the Future Homebuyer,” (January 2020); ATTOM Data Solutions; “Top 10 REFI Mortgage Lenders in Q4 2020,” ATTOM Data Solutions (March 5, 2021)